Fri Jul 13, 2012 6:43pm IST
* Front-month below last week's 6-month high * Hot weather still on tap in 6- to 10-day outlooks * Recent storage data, drilling rig data supportive * Coming Up: Baker Hughes gas drilling rig data Friday By Eileen Houlihan NEW YORK, July 13 (Reuters) - U.S. natural gas futures were slightly higherearly Friday, edging up amid continued heat across consuming regions in theNortheast and Midwest that has boosted air conditioning demand. But most traders expect prices will have a hard time breaking back abovelast week's six-month spot high over $3 per mmBtu, a level where gas tends tolose its appeal over coal for power generation. As of 9:05 a.m. EDT (1305 GMT), front-month August natural gas futures onthe New York Mercantile Exchange were at $2.886 per mmBtu, up 1.2 cents. The nearby contract rose to $3.06 last week, the highest mark for a frontmonth since early January, according to Reuters data. Since posting a 10-year low of $1.902 twice in late April, gas futures areup about 52 percent on signs that record production was finally slowing anddemand picking up as more electric utilities switched from coal to gas. ANOTHER BELOW AVERAGE BUILD, BUT STOCKS STILL BLOATED Thursday's gas storage report from the U.S. Energy InformationAdministration showed total domestic gas inventories rose last week by 33billion cubic feet to 3.135 trillion cubic feet. The build came in above Reuters poll estimates for a 26 bcf gain, but fellwell short of the year-ago and five-year average gains for that week, the 11thstraight week builds have fallen below seasonal norms. The trend has helped pull the surplus to last year - now at about 548 bcf -down by 38 percent from late-March highs. Traders, expecting strong weather-related demand ahead, believe the trendwill continue for at least another two reports, further reducing the overhang. Thursday's build trimmed the surplus to last year to 21 percent above thesame week in 2011 and also sliced the excess versus the five-year average to 20percent. (Storage graphic: link.reuters.com/mup44s) Lagging weekly builds have raised expectations that record-high storage canbe trimmed to more manageable levels in the 18 weeks or so left before winterwithdrawals begin. But total storage is still at record highs for this time of year and standsat about 76 percent full, a level not normally reached until the first week ofSeptember. Producing-region stocks are at 84 percent of estimated capacity. The storage surplus to last year will have to be cut by at least another 300bcf to avoid reaching the government's 4.1-tcf estimate of total capacity.Stocks peaked last year in November at a record 3.852 tcf. Early injection estimates for next week's EIA report range from 13 bcf to 44bcf versus last year's build of 67 bcf and the five-year average increase forthe week of 74 bcf. Concerns remain that the overhang could still drive prices to new lows laterthis summer as storage caverns fill. PRODUCTION STILL HIGH While gross U.S. gas production has slowed some from January's record highs,output is still flowing at near all-time peaks despite declines in dry gasdrilling and planned output cuts by several key producers. In its July short-term energy outlook released this week, the EIA raised itsestimates for marketed gas production and consumption growth in 2012. The agency expects marketed natural gas production in 2012 to rise by 2.8bcf per day, or 4.2 percent, to a record 68.98 bcfd. Consumption this year isseen climbing by 3.3 bcfd, or 4.9 percent, to 69.91 bcf daily. EIA expects a 21 percent jump in electric power use in 2012, primarilydriven by utilities switching from coal to gas, to more than offset declines inresidential and commercial use. Data from Baker Hughes last week showed the gas-directed rig count rose by 8to 542 after sliding to a 13-year low the prior week. It was the first gain in 7weeks. (Rig graphic: r.reuters.com/dyb62s) A 42 percent drop in dry gas drilling in the last nine months has stirredexpectations that producers were getting serious about stemming the flood ofrecord gas supplies. But horizontal rigs, the type most often used to extract oil or gas fromshale, are hovering just shy of the record high 1,193 hit in May. Drillers continue to move rigs to more profitable shale oil and shale gasliquid plays that still produce plenty of associated dry gas that ends up in themarket after processing. MORE FUNDAMENTALS The National Weather Service's 6- to 10-day outlook issued on Thursday againcalled for above-normal readings for about the northern two-thirds of thenation, with below-normal readings only on the West Coast and normal readingsacross the South. Nuclear power plant outages were running at about 8,000 megawatts, or 8percent, on Friday, up from just 4,700 MW out a year ago and a five-year outagerate of 4,600 MW. The U.S. National Hurricane Center said tropical cyclone formation was notexpected over the next 48 hours. The Atlantic hurricane season runs from June 1through Nov. 30. The latest government statistics show the Gulf of Mexico accounts for 6percent of U.S. gas production and just over 20 percent of U.S. oil production.